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Invoice Factoring Resource International An information and solution resource |
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Recourse and Non-Recourse Factoring
Recourse Factoring is the most commonly used type of factoring. Just as its name implies, the factoring company retains the legal recourse to collect from the seller any amount paid for an invoice that subsequently slips into default. In the event that your customer defaults on an invoice or simply refuses to pay for any reason, including disputes, your company is obligated to repay in cash or offset the unpaid invoice with another invoice of equal or greater value. Recourse factoring is the least expensive choice because it reduces the risk to the factor, which in turn reduces the factoring fees for your company. If you are not comfortable accepting the risk of default of your customers then you should consider non-recourse factoring. Non-Recourse Factoring is when the risk associated with non-payment of an invoice is fully transferred to the factor. If the customer refuses to pay the invoice, for whatever reason, the Factor does not have legal recourse to force the seller, your company, for payment of the invoice. If you don't want to be straddled with the risk of default, then you must be willing to pay for it. The factor's discount rate will be higher and your costs will follow suit if you want the factor to assume the risk of default. Hybrid Recourse refers to any method of factoring that is a result blending the two methods. There is always room for negotiation regarding the level of risk that each party is willing to accept. So, don't be afraid to suggest something that provides your company more or less risk than either of these. |
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The purpose of this site is to provide general information about issues involving invoice factoring. This site is not intended to substitute for professional financial or legal advice but instead is a general interest site where people can learn more about issues involving the subject matter. Copyright IFRI 2006 - Invoice Factoring |
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Before
you begin invoice factoring, you will need to
decide who is going to accept the risk for any
unpaid invoices that the factoring company
purchases from you. You will need to make
a choice between Recourse and Non-Recourse
factoring. The difference between the two
relates to who is responsible for an invoice
purchased by the factor that your
customer is unable or unwilling to pay.
Whichever type your company chooses will
determine who is the legal owner of the invoice
in the event that one of your customers becomes
insolvent.
